What must a law firm do when it discovers a former shareholder or employee stole client funds?

Plain-English summary

A firm asked about its ethical responsibilities after discovering that a previous shareholder or employee had misappropriated client funds. The ex-shareholder had also forged signatures on a client's check and had misrepresented to the client that the firm's bookkeeper had committed the fraud. The firm had already made full restitution, audited the ex-shareholder's trust accounts, obtained a sworn statement from the ex-shareholder, corroborated it against firm records, reviewed its bookkeeping and trust account mechanisms for compliance with RPC 1.14, and retained outside counsel to assess the steps taken. It asked whether any additional actions were required.

The committee addressed two rules. Under RPC 8.3(a), the lawyer and firm should promptly report the ex-shareholder's misconduct to the appropriate professional authority. The committee observed that because the rule uses "should" rather than "shall," there is no mandatory duty to report, but because "should" is stronger than "may," it strongly suggested that the lawyer and firm promptly report the misconduct. Under RPC 1.4(b), the committee was of the opinion that the firm had a duty to notify the client of any potential claims the client has against the firm, and that the client may need to seek the advice of independent counsel regarding other available remedies.

Currency note

This opinion was issued in 1995, before the Washington State Bar Association's adoption of the 2006 revisions to the Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here. Under Washington's pre-2006 numbering, RPC 1.14 corresponds to ABA Model Rule 1.15 (safekeeping property); RPC 1.4 and 8.3 correspond to ABA Model Rules 1.4 (communication) and 8.3 (reporting professional misconduct).

Common questions

Q: Does the firm have to report a former partner who stole client funds?

A: The committee said that under RPC 8.3(a) the firm should promptly report the misconduct, but that because the rule says "should" rather than "shall" there is no mandatory duty; the committee strongly suggested prompt reporting because "should" is stronger than "may."

Q: Does the firm have to tell the affected client?

A: Yes. The committee was of the opinion that under RPC 1.4(b) the firm had a duty to notify the client of any potential claims the client has against the firm and that the client may need independent counsel about other remedies.

Q: Were the firm's restitution and audit steps enough on their own?

A: The firm had already made restitution, audited the trust accounts, and reviewed its procedures under RPC 1.14; the committee's added duties were the RPC 8.3(a) reporting and the RPC 1.4(b) notice to the client.

Background and rules framework

The opinion applied RPC 8.3(a) (reporting professional misconduct, corresponding to ABA Model Rule 8.3), RPC 1.4(b) (communication, corresponding to ABA Model Rule 1.4), and RPC 1.14 (Washington's pre-2006 rule on safekeeping property, corresponding to ABA Model Rule 1.15). The committee read RPC 8.3(a)'s "should" as advisory rather than mandatory, and read RPC 1.4(b) to require notice to the client about potential claims against the firm and the possible need for independent counsel.

Citations and references

Rules of Professional Conduct:

• ABA Model Rule 8.3 (reporting professional misconduct); Washington RPC 8.3(a)
• ABA Model Rule 1.4 (communication); Washington RPC 1.4(b)
• ABA Model Rule 1.15 (safekeeping property); Washington RPC 1.14

See also

• WA Ethics Op. 1625: A "Right to Withdraw" Clause in a Fee Agreement
• WA Ethics Op. 1626: Firm Member on a City Council, Firm Adverse to the City

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=716

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Advisory Opinion: 1633
Year Issued: 1995
RPC(s): RPC 1.4; 1.14; 8.3(a)
Subject: Duties of law firm upon discovery of misappropriation of client funds by former law firm employee

The committee discussed your inquiry regarding the ethical responsibilities of a lawyer and a law firm upon discovery that a previous shareholder or employee had misappropriated client funds. In your inquiry, the ex-shareholder had also forged signatures on a client's check and misrepresented to the client that the law firm's bookkeeper had committed fraud and misappropriated the moneys.

In response to the ex-shareholder's conduct, the lawyers in the firm took the following actions: (1) made full restitution to the client; (2) performed an internal audit of all the ex-shareholder's trust accounts; (3) received a signed and sworn statement from the ex-shareholder of the circumstances of the misappropriation as well as a statement under oath that there were no other misappropriations; (4) independently corroborated the ex-shareholder's statements by comparing them to the law firm's records; (5) reviewed the bookkeeping and trust account mechanisms to assure compliance with RPC 1.14; and (5) employed outside legal assistance to determine the propriety and completeness of the actions taken. You asked the RPC Committee if the lawyer and law firm should take any additional actions to comply with the RPCs.

According to RPC 8.3(a), the lawyer and law firm should promptly report the ex-shareholder's misconduct to the appropriate professional authority. As the rule uses the term "should" rather than "shall", there is no mandatory duty to report misconduct. However, because the term "should" is stronger than "may", the Committee strongly suggests that a lawyer and a law firm promptly report such misconduct.

In addition, the Committee was of the opinion that the lawyer and law firm had a duty under RPC 1.4(b) to notify the client of the following: (1) any potential claims against the client has against the law firm; and (2) that the client may need to seek the advice of independent counsel regarding any other remedies available to the client.